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How long will it be before the Bank of England cuts interest-rates?

This morning has opened with some good news for the UK economy and it has come from the Nationwide Building Society. So let us get straight to it.

Annual house price growth slows to its
weakest pace since February 2013. Prices fell 0.7% in the month of December,after taking account of seasonal factors.

I wish those that own their own house no ill but the index level of 425.7 in December compares with 107.1 when the monthly series first began in January of 1991, so you can see that it has been a case of party on for house prices. If you want a longer-term perspective then the quarterly numbers which began at 100 at the end of 1952 were 11.429.5 and the end of the third quarter of 2018. I think we can call that a boom! Putting it another way the house price to earnings ratio is 5.1 which is not far off the pre credit crunch peak of 5.4.

The actual change is confirmed as being below both the rate of consumer inflation and wage growth later.

UK house price growth slowed noticeably as 2018 drew to a close, with prices just 0.5% higher than December 2017.

Also the Nationwide which claims to be the UK’s second largest mortgage lender is not particularly optimistic looking ahead.

In particular, measures of consumer confidence weakened
in December and surveyors reported a further fall in new
buyer enquiries towards the end of the year. While the
number of properties coming onto the market also slowed,
this doesn’t appear to have been enough to prevent a
modest shift in the balance of demand and supply in favour
of buyers.

Although they then seem to change their mind.

It is likely that the recent slowdown is attributable to the
impact of the uncertain economic outlook on buyer
sentiment, given that it has occurred against a backdrop of
solid employment growth, stronger wage growth and
continued low borrowing costs.

The economic environment is seeing some ch-ch-changes right now but let us first sort out some number-crunching where each UK country has done better than the average.

Amongst the home nations Northern Ireland recorded the
strongest growth in 2018, with prices up 5.8%, though
Wales also recorded a respectable 4% gain. By contrast,
Scotland saw a more modest 0.9% increase, while England
saw the smallest rise of just 0.7% over the year.

They have I think switched from the monthly to the quarterly data here as that average was up by 1.3%.

The UK economy

We have now received the last of the UK Markit Purchasing Manager Index surveys so let us get straight to it.

At 51.6 in December, the seasonally adjusted All Sector
Output Index was up slightly from 51.0 in November.
However, the latest reading pointed to the second-slowest
rate of business activity expansion since July 2016.

I am a little surprised they mention July 2016 so perhaps they are hoping we have short memories and do not recall how it turned into a lesson about being careful about indices driven by sentiment. This was mostly driven by the manufacturing sector which had Markit looking for a scapegoat.

December saw the UK PMI rise to a six-month high,
following short-term boosts to inventory holdings and
inflows of new business as companies stepped up their
preparations for a potentially disruptive Brexit.
Stocks of purchases and finished goods both rose
at near survey-record rates, while stock-piling by
customers at home and abroad took new orders growth
to a ten-month high.

So preparation is bad as presumably would be no preparation. It is especially awkward for their uncertainty theme which was supposed to be reducing output. But let us move onto the main point here which is that the UK is apparently managing some economic growth but not a lot. This matters if we now switch to the wider economic outlook.

The world economy

As I have been typing this the Chinese cavalry have arrived. Reuters.

China’s #PBOC just cut bank reserve requirement ratios by 100 bps, releasing an estimated RMB1.5t in liquidity by Jan 25. @cbeddor expected this, but argues the central bank can do a lot more – like cutting benchmark guidance lending rates.

Reuters are understandably pleased about finding someone who got something right. But the deeper issue is the economic prognosis behind this which we dipped into on Wednesday and is that the Chinese economy is slowing. For those wondering about what the People’s Bank of China is up to it is expanding the money supply via reducing the reserves banks have to hold which allows them to lend more. So they are acting on the quantity of money rather than the price or interest-rate of it. This relies on the banks then actually lending more. Or more specifically not just lending to those in distress.

Then there is the Euro area which according to the Markit PMIs is doing this.

The eurozone economy moved down another gear
at the end of 2018, with growth down considerably
from the elevated rates at the start of the year.
December saw business activity grow at the
weakest rate since late-2014 as inflows of new
work barely rose……….The data are consistent with eurozone GDP rising by just under 0.3% in the fourth quarter, but with quarterly growth momentum slowing to 0.15% in December.

We need to rake these numbers as a broad sweep rather than going for specific accuracy as, for example, Germany is described as being at a five-year low which requires amnesia about the 0.2% GDP contraction in the third quarter of this year.

Comment

If we switch to our leading indicator for the UK which is money supply growth we see a by now familiar pattern. The two signals of broad money growth have diverged a bit but neither M4 growth at 2.2% in November or M4 lending growth at 3.5% are especially optimistic. That only gets worse once you subtract inflation from it. Or to put it another way in ordinary times we would be in a situation where a bank rate cut would be expected.

What does the Bank of England crystal ball or what is called Forward Guidance in one of Governor Mark Carney’s policy innovations tell us?

The MPC had judged in November that, were the economy to develop broadly in line with its Inflation
Report projections, an ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a
limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon.

So “I agree with Mark” seems to be the most popular phase which should make taxpayers wonder why we bother with the other 8 salaries? Indeed one of them will be in quite a panic now as back in May Deputy Governor Ramsden told us that 8.8% consumer credit growth was “Weak” so I dread to think what he makes of the current 7.1%. Although @NicTrades has a different view.

that’s China fast!

So that is how a promised Bank Rate rise begins to metamorphose into a Bank Rate cut which will be presented as “unexpected” ( as opposed to on here where we have been watching the journey of travel for nearly a year) and a “surprise”, just like the last time this happened just over 2 years ago.

Let me finish by welcoming the addition of two women to the Financial Policy Committee as there is of course nothing like a Dame.

Dame Colette Bowe and Dame Jayne-Anne Gadhia have been appointed as external members of @BankofEngland‘s Financial Policy Committee (FPC)

So sadly the diversity agenda only adds female members of the establishment to the existing list of male establishment appointees. That went disastrously with the Honorable Charlotte Hogg who proved that even being the daughter of an Earl and a Baroness cannot allow you to avoid family issues, especially when you forget you have a brother.

Weekly Podcast

Including my answer to this question from Rob Wilson.

How can economies such as Italy and Japan endures decades of virtually zero growth and yet the general population don’t seem to be suffering compared to other economies with growth?

As the time period we are talking about for interest rates is so large, let us remind ourselves of the actual history.

In July 2007 rates were 5.75% but then started dropping quickly.In March 2009 they slashed rates from 2.0% to 0.5% and then kept them there until the BREXIT referendum in June 2016 went “the wrong way”, when Carney panicked and cut by a quarter to 0.25%, then in November 2017 he added that cut back so unchanged at 0.5%, then in August last year he raised rates by another quarter to 0.75%.

So we now have a central bank that regards the economy(read housing market) so weak that it requires interest rates at close to zero for TEN YEARS and unable to withstand even a quarter point raise for even a year before cutting them again!.

As James pointed out above, any further falls in sterling, further weakening of the economy or falls in house prices will now be blamed on BREXIT, the role of the Bank of England will be conveniently ignored.

As I said yesterday, these central banks are now trapped and can never ever raise rates again.

I still have a forlorn hope that Carney has to raise rates to protect sterling following “no deal”. however I fear that even the March29 deadline will be kicked into long grass, a year’s extension for Maybot to cast about the streets of the UK blind in a game of “pin the tail on the donkey”.

Sorry to nitpick but that £39 billion comprises:
– 20 months continuing membership of EU, so is the usual gross figure before rebates, UK share of various EU grants, etc
– fixed amounts we will owe even in case of a no deal exit to pay for important commitments such as Mr Farage’s pension as an MEP

so a no deal exit will divert about half of that amount from the EU, although some of the saving may have to go on compensation to various UK organisations.

On the plus side the US have been discussing this with UK representatives for a while and I’m confident they have a deal ready for us to sign on the dotted line.

Shaun, You are as bad at winding me up as the Carney circus. I keep voting for Brexit and No Deal so that we have to re-introduce a price to money, without an interest rate any attempt at capitalism and efficient distribution of resources is completey lost cause!

Sorry about that, but I would rather look at reality rather than the fantasies of so-called forward guidance. There was a chance to raise interest-rates in the early to middle part of Mark Carney’s term as Governor but he missed the boat. One day the boat will return but when is not easy to say and so far he had shown little inclination to support the value of the £.

I love the cognitive dissonance in the press with regards to houseprices. Rails fares up 3% and there’s outrage. Whilst houseprices rising at 2% and they’re cheering.

It will be interesting to see what happens with halifax on monday. There’s a good chance that all 3 indicies will be negative. I’m sure they’ll be manipulating the figures long into the weekend to get that 0.000001% rise.

from the front line in selling my dad’s house I have seen from research that it appears we’re back to 2014 prices at least in Surrey. blame has been put on BTL pulling out and needing cash – so downward pressure is on

of course it would be cynical of me to suggest that this is a planned operation just before Brexit to get the public to change it’s mind…….*

Interesting Forbin,
We very rarely get actual factual data from real people. Only Shaun’s indicies which are cooked up by quangos. There is a sharp difference between the Estate Agent and Lenders storyline that the values are still riasing but slower than before. Maybe your property is in a unique “blackspot”, too many oldies and not enought younger folk earning to buy…

Hi Paul/Forbin,
Nationwide and Halifax record their data from mortgage approvals and so do not include cash transactions (30-40% of transactions) or BTL and may vary from final price achieved as the data is accumulated at the approval stage, I think the best indication is UK HPI and Rightmove(you can check the price history of properties on their website) which uses actual sale price achieved from the Land Registry, I think from 2019 onwards, the difference between the price achieved and that advertised will start to vary enormously as the market stalls.

There are alternative views of the economy and some of these (particularly those that see the economy as an energy system) believe that the developed economies have been on a slow slide since well before GFC1 in 2008 because the related costs of energy is leaving less and less in peoples’ pockets in terms of discretionary spending.

This gap between discretionary funds available and desired spending has largely been filled by debt but it has grown so large that we can no longer afford anything near “normal” interest rates. Asset bubbles are an inevitable consequence but can only go so far without the total abandonment of rational lending standards. The wall is in front of us but the only control is the accelerator. This is mad house economics and it must have an end point.

The interesting question is not how long it will be before the BOE reduces interest rates but what happens when we get to 0.1% – what happens next? More QE? Direct buying of stocks? Negative rates? These are tricks to keep the house of cards upright. They won’t succeed and sooner or later the house of cards will collapse.

The clever and self serving, and ultimately incompetent, sophistry these people employ to justify their actions are contributing to the erosion of trust in some of our institutions and show just how venal some aspects of public life have become.

Thieves and a house fire would be the risk, moreover extra money needed on security.

Whichever way you look at the present situation in the UK almost nil paid on interest deposits and over 30% been eroded by inflation in the last 10 years on money in the bank. This is one reason why the stock markets reached new highs last year now they have taken a hit.

There is another moral argument:

Matthew 6:19 19″Do not store up for yourselves treasures on earth, where moths and vermin destroy, and where thieves break in and steal.

There will be no bank runs as they will introduce daily limits on the amount you can withdraw as cash -try going into your bank NOW and asking for more than a few thousand in cash and see the response you get – they will make it so difficult, they treat you and talk to you like you are a criminal for asking for your own money back , imagine if it is like that now, what it will be like when there are queues around the corner at every branch with a limit of say £500 per day, good luck with that.
Then there is the option of safe storage in their secure vaults, imagine the charges, probably close to the level of negative interest to act as the final deterrent.
Then there is the old time element, new notes to be printed with an expiry date, after which it is no longer legal tender, forcing you to spend it.
Preposterous? just wait and see, add in exchange controls preventing you from changing it into another currency to try and preserve its value against another central bank less rapacious that the Bank of England – couldn’t happen? already hapened in the 70s, simply re-introduced with the stroke of a key.

Quite why we arent allowed a recession any more is beyond me, they were once deemed a necessary part of capitalism, but now the rich and boomer middle class see that it’ll mean they don’t get the lifestyle they’ve had gifted to them thanks to Blairites, Keynesians and neoliberals … it seems people get overly excited about them.

North East England in the 80s was allowed a govt created depression, why is the south of England not allowed to take the hit.

“but now the rich AND BOOMER middle class see that it’ll mean they don’t get the lifestyle they’ve had gifted to them”
“North East England in the 80s was allowed a govt created depression”
___________________________________
Whom do you think were the greatest victims in the 1980’s depression?

The bubbles in property the stock market and debt will burst.The Government and more importantly the population are maxed out on debt.Real wages are falling unless you are one of the ‘because were worth it brigade’ in charge of FTSE 100 companies who remuneration like property prices in London and the South East are so detached from reality a Wile E Coyote type plummet to earth cannot be far away.
Brexit is a side show an irrelevance the EU did not cause our word and leaving won’t help.
Property prices are dropping in Australia in Melbourne and Sydney in particular this will happen here it must and interest rates should price in risk as well as inflation.Interest rates and bond prices are also detached from reality it’s like Mary Poppins unfortunately Mary Poppins always has a happy ending this will not,liars and charlatans run our institutions and their accolytes own the media so the majority of the population are oblivious to what could happen here.

I thought this from The Canadian Press would add some grist to your mill.

“The Toronto Real Estate Board says there were 77,426 residential transactions recorded through its Multiple Listing Service (MLS) system last year, down 16.1 per cent from 92,263 sales in 2017.

Metro Vancouver home sales fall to lowest total since 2000
More vacant properties on Toronto real estate market, broker says
The board says the total number of new listings was also lower, pulling back 12.7 per cent to 155,823 in 2018.

Meanwhile, the average selling price for all property types in the GTA fell by 4.3 per cent to $787,300.”

Thanks Shaun like many others I have been surprised how long they have been able to keep the housing bubble inflating I think there is evidence in Canada Australia and London that we have probably peaked it remains to be seen whether there will be a slow deflation of the housing bubble or something much more dramatic.

My home town of Bangor in Northern Ireland was the highest rising house market in the UK for the three years up to the bubble bursting, so maybe that canary is looking a bit wobbly on its perch again.

What does seem to be different is volume of sales. When I was home for Christmas, the EAs’ windows were full of stuff that had been there a good while (judging by the leaves on the trees in the pictures). And plenty of areas in Cornwall are still at pre-2007 price levels. So it’s difficult to read exactly what’s going on. Probably because of the scale of government intervention this time around.

Your reply led me to looking up the regional data for Northern Ireland so here goes. The index was set at 100 in 1993 and by 2004 you had done pretty well as prices had trebled. But that was only the start as in the middle of 2008 they were 6 and a half times higher. So there was a boom like the one south of the border at least in relative terms.

But then prices more than halved and have since recovered to four times their starting point. So perhaps the lack of sales are caused by everyone feeling more than a little dizzy.